The Opportunity of "Spin-Offs" for Corporates

Spin-off: We all know this term from the cinematic world that has already sparked strong businesses?

The "Spin-off" for companies is the creation of a new company by splitting off a branch from the so-called "parent" company. Basically, it's when a subsidiary activity of the company becomes so significant and compelling that it can become a business on its own. 

But… Why create a "Spin-off"?

Spin-offs represent a key strategy for large companies seeking to exploit new opportunities while minimizing risks and optimizing flexibility. Here are three main reasons why companies opt for this approach:

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1. Managing Reputational Risks through Activity Segregation

Large companies often operate in diverse sectors, each with its own risks and regulatory requirements. By creating a spin-off, a company can separate a specific activity, thereby reducing the risk of contaminating its core activities in case of issues. For example, if a risky or controversial activity arises, it can be isolated within the spin-off, thereby limiting negative impacts on the overall reputation of the parent company. This segmentation also allows for more effective crisis management and enhances transparency with stakeholders.

2. Budgetary Independence and Access to External Financing

Spin-offs benefit from financial independence, allowing them to manage their budgets independently from the parent company. This provides them with the flexibility to allocate resources specific to their needs without being constrained by the overall budgetary constraints of the group.Furthermore, spin-offs can raise funds from external investors or obtain public financing, which may not always be possible for the parent company due to its own policies or financial constraints. This ability to access external sources of funding allows spin-offs to finance their growth and innovations without straining the internal resources of the parent company.

3. Alignment of Interests with Founders

By creating a spin-off, a large enterprise can more closely align the interests of founders with those of the company. Founders and key employees of the spin-off are often incentivized through equity stakes or stock options, thereby aligning them with the long-term growth and success goals of the enterprise. This fosters an entrepreneurial environment where decisions are made swiftly and effectively, and where outcomes directly correlate with the spin-off’s performance and achievements. As a result, this encourages innovation and calculated risk-taking, crucial elements for driving growth and competitiveness in the market.In short, spin-offs provide large enterprises with an effective strategy to manage risks, access external funding, and align the interests of founding teams, while exploring new growth opportunities without compromising their core operations. This approach enables agile and strategic management of activities, thereby enhancing the overall resilience and innovation capacity of the enterprise.

An example to better understand:

A computer technology company specializing in R&D discovers a solution against a virus capable of retrieving your banking data. One of the possibilities available to it is to develop the solution internally, start hiring people to work on this new product, and then operate a split to create a new company whose mission will be to develop and market this antivirus.

With this example, you easily understand the interest of the Spin-off! 

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If this seems relatively "simple" on paper, there are still some key points to verify and implement before carrying out a Spin-off:

• Wait for the right moment before launching the Spin-off and therefore "letting go" of the parent company. Before that, you are still "protected" by the parent company, afterwards you will have to fly on your own and therefore be sure to succeed.
• As with all businesses, it is important to surround yourself with the right people and build a good team to successfully carry out this project. When we talk about "team," this also includes the management that will be put in place.
• Respect all the steps of creating a company. Launching a Spin-off does not mean skipping steps such as Go-to-Market or Time-to-Market, for example.
• Check the obtaining of necessary funds, whether through external investment or via the parent company. This already allows you to have market feedback to know if your product/service can succeed or not. If you have no investors, it could be a negative sign for the sustainable development of your project.
• We mentioned this in our article on startup studios. To ensure a smooth transition, employees can work for both companies for a period of time. This allows for the official launch of the Spin-off, continuing development while structuring with new employees and processes dedicated to the Spin-off.
• Find the right balance between wanting to be completely detached from the identity of the parent company and being "too attached," with the risk that the market only identifies us through it.

With this information, you have the main key points to understand and implement a Spin-off in your company.

We have already partially answered this so far, but: What are the advantages of creating a Spin-off? 

Here are some of them:

• Increase in revenue through the development of a new activity.
• The possibility of having a more "agile" operation than in large companies, which may not be feasible due to their size. The new company can truly operate like a startup and often appear more "modern" to the general public than a large group. We could take the example of online banks usually launched by larger, more "traditional" banks.
• Faster development because it doesn't start "from scratch". It benefits from the experience, network, and reach of the parent company.
• The possibility to address clients of the parent company because its culture is often similar, if not the same, as yours.
• The "Spin-off" model also allows for the development of activities that are not "core business," meaning they are not linked to the value proposition of the parent company.
• A company that has already launched a Spin-off may eventually develop several ideas internally and later spin off some of them into viable businesses.

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It should also be noted that some Spin-offs can become so significant that they even surpass the parent company in terms of media exposure or investor interest. Therefore, there is a challenge for the parent company to carefully choose its strategy when creating a Spin-off!

Some companies have become such Spin-off factories that the term "incubated" is used, much like an incubator, with a true notion of dedicated support for Spin-offs. The boundary can become very thin between a parent company that neglects its "core business" to support its Spin-offs under the best conditions, and a company that becomes a ideation lab, which, mistakenly, could be called an incubator...